Nickel miners Western Areas and Independence Group NL jumped as nickel prices climbed.

Weighing on the index, however, were financials stocks.

The financial index fell as much as 1.1 percent to its lowest in more than five months. Westpac and National Australia Bank fell as much as around 1.5 percent.

Australian bank shares have been whipsawing ever since the government announced new tax levies on banks, which could add up to a total of around A$1 billion in additional annual costs for the 'Big Four' banks.

"There's a debate aboiut what the levy means for banks' strategy going forward - do they pass it on to shareholders by decreasing dividends, do they increase loan rates, do they cut staff...those uncertainties are weighing on the sector, and dragging the markets lower," said Tony Farnham, economist at Patersons Securities.

Concerted efforts by Australian banking regulators to cool the country's red property market have also pressured banking stocks.

"Banks are stuck in a band with their main money maker, i.e. the housing bubble, running into limits...time to take profit and come back later when relative value returns to the sector," BlueOcean Equities said in a note.